Israel misses gas bonanza due to mismanagement

Tamar

Experts believe double the amount of gas already discovered remains to be found beneath Israeli waters but the Royee fiasco shows the incompetence of all concerned.

All of the experts who have examined the subject of Israel's offshore natural gas agree on one thing - there are huge quantities of undiscovered gas in Israel's territorial waters. At a conservative estimate, the amount of undiscovered gas is equal to the combined amount in all of Israel's known field: Tamar, Leviathan, Karish, Tanin, and the smaller reservoirs. Higher estimates put the quantity of undiscovered gas at double the amount already discovered.

It is difficult to exaggerate the importance of this figure. Discovery of several more natural gas fields would have not only increased competition in the sector and possibly reduced consumer gas and electricity prices; it would have also gained the state many billions of shekels in taxes on gas profits. At a time when we are faced with a rising budget deficit, these billions are especially necessary.

In practice, however, this potential is not being utilized. Except for one small discovery this year, no important gas has been discovered in Israel's territorial waters since 2012. Just two companies, Yitzhak Tshuva's Delek Group Ltd. (TASE: DLEKG) and US company Noble Energy Inc. (NYSE: NBL), are responsible for nearly 100% of the gas discovered to date.

The reasons for this prolonged failure are not confined to Israel; they include rock bottom global natural gas prices, the geopolitical risk, and the fairly small regional market. These considerations deter large energy companies from entering the oil and gas exploration sector in Israel.

These factors do not, however, explain the lack of success of most of the companies already exerting efforts to find gas in Israel. Responsibility for this failure is shared by the companies themselves, the regulator, and the Ministry of National Infrastructure, Energy, and Water Resources. The Royee license saga, which probably reached its dismal finale two days ago, highlights very well what the meeting between developers acting in a manner bordering on amateurism and a regulator not knowing what to do with them looks like.

Over six years of postponements and delays

Ratio Oil Exploration (1992) LP (TASE:RATI.L), which holds 70% of the rights in the Royee license, notified the Tel Aviv Stock Exchange (TASE) on Tuesday that it was "considering the options available to it." The announcement was made following the announcement by Edison, Ratio's partner in the license, that it would not be part of the project. Edison is the operating company that was responsible for carrying out the drilling for finding gas in the area of the license, which was scheduled for next February.

Edison's withdrawal puts the planned drilling in doubt, which in any case was to have taken place on a challenging schedule, due to the fact that the license is due to expire in early 2020. Since Ministry of National Infrastructure, Energy, and Water Resources petroleum commissioner Yossi Wirtzburger has already extended the license, the second time to the full period permitted by law, it appears that the almost unavoidable result will be the return of the license to the state.

The likelihood of discovering a gas field with 3.4 trillion square feet (TCF) of gas in the Royee license area, on the maritime border between Israel and Egypt, is 36%. Tshuva and his partners had similar figures before the drilling in which the Tamar gas reservoir, the net value of which is over $10 billion, was discovered. Projected revenue from Tamar in the coming decades is in the hundreds of billions.

The rights to explore for gas in the area were given more than a decade ago to Ratio, whose seismic tests found a number of geological structures likely to be gas reservoirs. In 2013, the petroleum commissioner granted a three-year license to Ratio (70%), Ratio's partner Edison (20%) and Israel Opportunity (10%) with no payment whatsoever. The license holders undertook to meet the work plan for gas discovery drilling.

For over six years, the Royee license and its potential for discoveries were featured in the presentations made to TASE investors by Ratio and Israel Opportunity. During this entire period, no drilling took place in the license, but every time that the companies failed to fulfill the timetable for drilling, the regulator accepted the explanations by the owners of the rights, and granted them extensions and concessions.

Enter Energean

Edison, an Italian company with widespread activity in Egypt, has done nothing in Israel since becoming a partner in the Royee license. Wirtzburger nevertheless twice extended the validity of the license, each time by two years, in order to enable the partners to carry out the planned drilling.

As part of the latest extension, the three partners undertook to submit to Wirtzburger a signed contract with a drilling contractor by June 15, and to begin drilling by September 30. At the same time, the petroleum commissioner approved giving Edison an option to withdraw from the license in return for a "promise" by Ratio that it would carry out the drilling in place of Edison, if Edison withdrew, even though Ratio had never carried out similar drilling in Israeli waters.

The result was entirely predictable. The partners failed to meet the timetable. This time, they told the petroleum commissioner that they were "just about to sign" an agreement to lease a drilling platform from the Maersk company in Egypt, and that the drilling itself would begin no later than February 2020, two months before the final expiration of the license. On Tuesday, it was learned that this promise would also not be kept.

Why did Edison exercise its option to withdraw from the license? The company was recently acquired by Greek company Energean Oil & Gas plc (LSE: ENOG; TASE: ENOG), which is developing the Karish and Tanin fields  with great success. Energean was astounded to discover that the cost of the planned drilling was $60 million, while similar drilling conducted by Energean in North Karish cost only $25 million.

The Greek company also concluded that the timetable set for the drilling was unrealistic. The same platform that is supposed to perform the drilling in Israel in February is assigned to carry out a series of drillings in Egypt in November. The chances that it will succeed in zigzagging between the two countries are not good.

Energean therefore authorized Edison to abandon the Royee license, which will thereupon revert to the state in April. Ratio, which also holds 15% of the rights in Leviathan, tried to bring in its partner in Leviathan, Delek Drilling LP (TASE: DEDR.L), as a partner in the Royee license at the last minute, but Israel Competition Authority director general Michal Halperin vetoed this measure. The current financing capabilities of Ratio, which is allocated most of its resources to financing its share of development in Leviathan, are limited. Ratio's interest in this case is to invest in Leviathan at the expense of the necessary investment in Royee.

Will this dismal saga repeat itself again, assuming that the license reverts to the state? The Ministry of National Infrastructure, Energy, and Water Resources says that what happened with the Royee license is over and done with, and that it is now turning over a new leaf. Meanwhile, the gas is still beneath the Mediterranean Sea.

A coincidence? The peculiar timing of Ratio's announcement

A few short hours before Ratio's announcement that it was considering its options, the Ministry of National Infrastructure, Energy, and Water Resources petroleum council granted Ratio eight new maritime oil exploration licenses - this time with other partners: Cairn and Soko.

Sources inform "Globes" that Ratio was aware of Edison's withdrawal from the Royee license a few days before the announcement to the TASE, which raises questions about the date of its publication. A likely suspicion is that Ratio delayed its announcement because it feared that it would anger the regulator before the additional licenses were granted. Ratio said in response that it was a coincidence, and that there was no connection between the two events.

Energy Ministry: We will consider foreclosure of guarantees

The Ministry of National Infrastructure, Energy, and Water Resources said in response, "The petroleum commissioner is responsible for advancement of the oil and gas sector, and extends exploration licenses following a professional examination and the exercise of judgement. The petroleum commissioner took a $2.5 million guarantee to secure the obligation to drill in the Roy license. Foreclosure of the guarantee will be considered in the light of meeting the work plan.

"We are interested in the renewal of drilling and the existence of a prosperous gas sector. The petroleum commissioner accordingly allowed Ratio to take Edison's place as the operator of the license. The assertion that the timetable for the drilling program is unrealistic is incorrect."

Concerning future actions in the Royee license and involving gas exploration companies in general, the ministry said, "The license was granted several years ago in accordance with the procedures prevailing at the time. In the competitive proceeding now used by the petroleum commissioner, clear and precise timetables were set for carrying out drilling actions."

Ratio said that restrictions on the exporting of gas from medium-sized gas reservoirs imposed by the government committee headed by Shaul Tzemach had delayed development of the fields for a long time.

Ratio stated, "We are studying the announcement we received concerning the Roy license. We are in a dialogue with the Ministry of National Infrastructure, Energy, and Water Resources, and are considering the options available to us." Sources linked to the company said, "The holders of rights in the Roy license invested a total of $16 million over the years in financing seismic surveys and search operations in accordance with the license terms, so it clearly cannot be said that nothing was done

Published by Globes, Israel business news - en.globes.co.il - on August 1, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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